In the current chaos of the Euro zone, Germany is almost seen as role models (along with France to a lesser degree) for the other failing countries. Their strength is in exporting goods where they are currently ranked as the second largest in the world (this puts them ahead of the USA) and is a big factor in them having the largest economy in Europe. The Fortune Global 500 includes 37 companies located in Germany and they are one of the leading countries in developing and using eco-friendly technologies. Sounds good right?

It gives strong evidence to the idea that Germany is the future of the Euro, with countries like Greece, Portugal and Italy expected to mimic Germany’s efforts. Germany has consistently pulled the Euro forwards during the bad times, they did this in 2010 by exploiting the weak Euro and moving their exports into overdrive whilst refraining from importing themselves (effectively bringing money into the country and not letting it back out). One aspect of their economy that other countries could learn from has been there attitude to unemployment; they changed their benefits systems at the start of the century to motivate people back into work, with benefits harshly cut if the healthy were out of work for too long. These harsh methods inevitably brought results, and Germany’s unemployment has dropped since the recession of 2007, while the USA’s for example has risen. Another interesting factor is that Germany was never really sucked into the housing bubble; German banks required a 40% down payment which restricted the house prices from increasing too much.

But does this really paint the full picture of Germany? There are some inconvenient truths that are usually left out when talking about Germany, like for instance despite many praising there strong recovery after the recession, it is left out that they had one of the largest fiscal stimulus programmes in Europe (the government spending more money, rather than cutting debt). The praise about low unemployment also hides the truth that many companies were asked to cut hours rather than fire employees, which kept good numbers for the public, but has probably just delayed employment problems for the future. The more damming statistic is that during 2010, Germany actually increased their budget deficit (when other countries were decreasing) and in 2011 had a very low decrease. But that’s not all; Germany’s debt to GDP ratio is 80% which is not role model material at all, with countries like Finland, Denmark and even Spain showing better ratios.

We can also look at the primary balance; this is countries revenue (excluding any new borrowing) minus expenditure (government spending excluding interest on old debt). This has been used to judge countries like Greece and Portugal in current bailout schemes, but looking at Germany’s past primary balance isn’t too convincing with the period before the recession revealing a deficit. Compare this to Italy who have performed well in this regard and are set to achieve a surplus of 3.1% in 2012.

So, is Germany the role model for how Europe can get back on track? The fact is they have a strong economy that negotiated the recession well and might have even done better if they hadn’t be brought down by the Euro crisis. But they have yet to tackle their debt and seem set on increasing borrowing and spending. The hypocrisy of “do as I say not as I do” means they lose my vote, but is there a better option?

Another year, another new year’s resolution we will never keep to. My resolution; cutting down on doughnuts and working on the love-handles in time for beach-season. The UK economy’s resolution; a similar one involving cutting down on inflation and working on the deficit in time for Olympics-season.

Unfortunately 2011’s strong expectations of GDP, to support the economic turnaround, were unfounded and we recorded a disappointing 1% increase in national output. Instrumental to the UK’s poor performance was and still is the Eurozone’s debt crisis, which no one anticipated to grip the headlines and Mr Cameron’s nightmares to the extent it did. Of course the Eurozone debt crisis has not only left the most indebted economies, Greece, Portugal and Italy, scrabbling around for the fiver they left down the back of the sofa for emergencies, it has also hit surrounding countries with decreased trade and depressed investment confidence. Mix that with employment, retail sales and consumer confidence all decreasing in the final quarter of 2011 and it is clear to see why the PM had a not so festive headache in the lead up to Christmas.

2012 signals a fresh start, a tightening of belts and what the British do the best, a stiff upper lip. UK inflation, the continual rising of price levels, consistently stood at 5% (encouraged by fuel costs rising by 20%) last year, over double the Bank of England’s target of 2%. Getting this figure down is playing on the mind of Mervyn King, Bank of England, whom will endeavour to dampen inflation, lowering UK prices relative to overseas and hence improving international competitiveness and trade revenues. In the wake of the Eurozone disaster strengthening trade links with other countries is pinnacle in avoidance of contagion and future success.

Most notably though there is 200 days until the London Olympics and besides making me feel guilty for eating that last doughnut, it is estimated to generate £10bn of revenue for the British economy. The project will have created 2.8m jobs in construction, a sector recently suffering, and creating an infrastructure that will encourage the stars of tomorrow. With an estimated 4bn viewers for the opening ceremony, London will be distinguished as meaning business in 2012.

Despite a seemingly positive outlook and supposedly having learnt from our mistakes last year, predictions for 2012 are cautious. The British Chambers of Commerce expect unemployment to reach peaks of 2.62m and public borrowing to rise to £127bn, some £5bn higher than previously anticipated. However, GDP growth should rise to 2.1% showing positive beginnings, based on increased consumer spending and improved lending availability from banks.

But will this actually occur? Understandably no one knows, if the last four years has taught us anything it is that there is no crystal ball, no one can envisage hidden eventualities such as the Eurozone crisis and ultimately no one knows if they will keep their new year’s resolution.

There has long been conflict between Iran and the west. In the coming months, if not weeks, many are predicting a war. But could the war already be going on?

Economic sanctions are nothing new, where countries restrict trade with a single country to try and force an issue, but the USA seems to have taken this a step forward recently with Iran.

The US government targeted the central bank of Iran; threatening international banks that they would be excluded from the global dollar payment system if they continued to work with the central bank.

Suddenly, there wasn’t many dollars in the country and the rial (Iranian currency) dropped in value against the dollar by 40%. Local prices doubled as panic spread and Iran had to raise interest rates by more than 20%. In days the US had shattered the exchange value of the rial, caused hyperinflation and a dramatic change in interest rates.

It’s a strong economic weapon the USA have, though how long it will last is debatable. The dollar has seemed weak in recent years and countries such as China and Russia have looked to move away from it. This was shown, returning to Iran, as India and China have looked to keep trading by looking outside of the dollar based system, with India putting together a deal of gold for oil.

With Iran an important player in the oil market, countries will continue to trade with them even if it means moving away from the dollar. With China, they will be promoting the yuan as an alternative world currency; their continued growth into a global superpower giving it a strong foundation. But India’s use of gold is an interesting idea as a return to the gold standard that preceded the rise of the dollar. Both show a weakening in support for America’s currency that has appeared withering since Obama approved quantitative easing of around $2tn over the last three years weakening the value of the dollar.

So with the US finally realising how important a weapon the dollar can be, is it now too late?

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Kane Prior

My name is Kane Prior and I like to write about economic issues from around the World. I am a graduate from the University of Kent with a 2.1 degree in Business and Economics. I hope to use this blog to gain interest in myself and maybe lead to some potential career someday. If you want to contact me I am on Twitter (just click on the image) and if you have any writing opportunities for me, then please feel free to drop a message.

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